Fixed charge is a charge on definite or specific property,
i.e., the charge attaches to the property that is identified at the time when
the charge is created, e.g., land, heavy machinery, buildings. The essence of fixed charge is that though
the possession of the specified asset is with the company but the legal title belongs to the holders of the
charge. The consequence of this charge is that the company cannot dispose of
that asset , free of charge, without the
consent of the holderc of the charge. Even if it is disposed of, the holders
of the charge will have the first claim as
against the buyer of the property. If company creates a fixed charge on stock
in trade, company will not be able to
deal in that. This would limit the company's
Powers to borrow. Hence a floating
charge, is generally, created on assets such as stock- in-trade.
Floating charge, on the other hand, is not attached to
definite property, but covers property of a fluctuating type, e.g.,
stock-in-trade. The characteristics of a floating charge are: (1) It is a
charge on a class of assets, present and future; (2) The class of assets
charged is one which in the ordinary
course of business, is changing from time to time; (3) Until some steps are
taken to enforce the charge, the company may continue to deal with the assets
charged in the ordinary course of business.
No particular form of words is necessary to create a
floating charge. Any words which show an intention to allow the company to
continue to deal with the assets by sale, lease, mortgage, etc., in the course
of its business will create a floating charge. The advantage, of such charge is
that the company may continue to deal with the property charged.
Whether a charge is a fixed charge or a floating charge will
depend upon the words used in the document creating the charge; the essence of
floating charge being the freedom of the borrower to use the assets charged, in
the ordinary course of its business. It con even create a specific mortgage of
the property, already subject to a
floating charge, without the consent of the holders of the charge and the
registered mortgagee shall have priority over the change [Wheatley v. sibstone Co. (1885) 29 Ch.D.7151. But a company cannot,
however, create a further floating
charge on the same assets to rank in priority to or pari pasv with the existing charge unless such power has been
reserved by the company [Re Benjamin Cope
& Sons (1974) 1 Ch. 800). Before crystallisation of the floating
charge a company may even sell the whole of the undertaking if that is one of
the object specified in the memorandum [Re
Borax Co. (1901) 1 Ch.326]. Where, however, a specific charge is made
expressly subject to floating charge, the former is postponed as from the date
when the later is crystallised [Re Robert Stephenson] & Co. Ltd. (1913)
107L.T. 33].
A floating charge can be created only by an incorporated
body. It is created by a deed and must be registered with the Registrar of
Companies.
Crystallisation of a
floating charge. A floating charge crystallises and becomes fixed in the
following circumstances: (1) when the company goes into liquidation; or (2) When
the company ceases to carry on business; or (3) When the debenture holders take
steps to enforce their security, e.g., by appointing a Receiver, etc., on default
by the company to pay principal and interest.
Effects of winding up
on floating charge. (A) According t o s.123,the debts, which are entitled
to a preferential payment in the event of the winding up of a company under s.
530, get priority over the claims of the debenture holders having a floating charge,
even though the company is not in the course of winding up. (B) Where company
is being wound up, a floating charge on the undertaking or property of the company
created within 12 months immediately preceding the commencement of the winding up
shall be void unless: 1, The company was solvent immediately after the charge
was created; and 2. The amount was paid to the company in cash at the time of
or subsequently to the creation of and
in consideration for, the charge together with interest on that amount at the
rate of 5% per annum or such other rate as prescribed by the Central Government.
The object of the above provision is to prohibit
insolvent companies from creating any floating charge on their assets with a
view to secure past debts to the prejudice of unsecured creditors.
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